Fitch affirms Arab Bank at A-

Fitch Ratings has affirmed Arab Bank PLC’s (Arab Bank) Long-term Issuer Default Rating (IDR) at ‘A-’ with a Stable Outlook. The Viability Rating (VR) has also been affirmed at ‘a-’.

“Arab Bank’s IDRs are driven by its intrinsic strength, as reflected in the VR. The bank operates across the MENA region and internationally through a number of subsidiaries and branches and a sister company in Switzerland, collectively the Arab Bank Group. The group is to a large extent run as one entity, by the same management at senior level. Consequently, when rating Arab Bank, the analysis and the rating drivers take account of the balance sheet strength and performance of the group as a whole. Although domiciled in Jordan, Arab Bank’s ratings are not considered to be constrained by Fitch’s view of the Jordanian sovereign because of the group’s geographic diversification, with almost 80% of the group’s assets outside the Kingdom,” Fitch in a statement said.

“The VR reflects the bank’s overall sound risk profile, solid capital and strong liquidity. Nonetheless, it also considers the increasing risks (mostly credit) associated with the bank’s operations across the MENA region, specifically in the ‘Arab Spring’ countries. The risks are increasing as a result of the unrest and economic slowdown. Although the effects have so far been manageable for Arab Bank, hence the affirmation of the ratings there is increasing negative pressure on the ratings. The relatively high ‘F1′ Short-term IDR was affirmed based on Arab Bank’s strong liquidity, and the bank’s on-going focus on maintaining a high level of liquidity even at the expense of profitability,” it added.

The Support Rating and Support Rating Floor reflect the fact that Fitch does not factor support into the rating. Support from the Kingdom of Jordan, if required, is possible, but given Arab Bank’s size, cannot be relied upon. The bank has several core shareholders, but it is difficult to assess their willingness and ability to provide support at all times.

The stable outlook reflects Fitch’s expectation that any further worsening of the situation across the MENA region will continue to be manageable for Arab Bank, and that it will not materially weaken the bank’s liquidity or capitalisation.

The bank’s financial performance has exhibited consistent trends over the past several years. Performance has been affected by unrest in some MENA countries in that growth has slowed substantially, but despite this, Arab Bank reported a moderate increase in core earnings both in 2011 and Q112 and moderate (possibly unsustainably moderate) impairment charges.

Loan quality remains sound with impaired loans decreasing to $1.4billion (excluding interest in suspense) at end-2011, or 6% of the loan book. There was hardly any change in Q112. Aside from two large Saudi exposures, impaired loans are fairly small and diversified across a range of sectors. Reserve coverage was satisfactory at 98% at end-Q112, with unreserved impaired loans insignificant at less than 0.5% of the group’s end-Q112 equity.

The bank’s emphasis on maintaining high levels of liquidity means that it has a relatively low proportion of loans on its balance sheet. Net loans accounted for only about 45% of assets, with the remainder split between a portfolio of mostly liquid securities, interbank and central bank deposits. Bank deposits are mainly placed with highly-rated European banks, thus ensuring that a substantial part of the balance sheet is held outside Jordan and the Middle East. Capital position remains sound, helped by internal capital generation. Arab Bank’s Fitch Core Capital ratio was 24.3% and the Tier 1 ratio 14.9% at end-Q112; the difference being a result of investments in associates deducted from the Tier 1 ratio.

Downside risk to the ratings has increased. The bank’s ratings are sensitive to any sharper than expected deterioration in its risk profile, capitalisation, liquidity or profitability, or to further deterioration in the MENA markets in which the bank operates. Continuation of the unrest in the MENA region would be likely to lead to a rising level of impaired assets and consequently possible negative rating action. Given its current high rating levels, upside is limited.